Munich Personal RePEc Archive Edith Penrose’s ‘The Theory of the Growth of the Firm’ Fifty Years Later Pitelis, Christos 13 March 2009 Online at https://mpra.ub.uni-muenchen.de/23180/ MPRA Paper No. 23180, posted 10 Jun 2010 05:46 UTC Edith Penrose’s ‘The Theory of the Growth of the Firm’ Fifty Years Later∗∗∗ Christos N. Pitelis Judge Business School and Queens’ College University of Cambridge Trumpington Street Cambridge CB2 1AG UK Tel: 0044 1223 339618 Fax: 0044 1223 766815 Email: [email protected] 13 March 2009 ∗ This paper draws and builds upon earlier work by Penrose and Pitelis (1999) and Pitelis (2004, 2005, 2007a, 2007b). am grateful to Edith Penrose for discussion and numerous colleagues for comments on earlier drafts, especially Mie Augier, (ohn Dunning, (oe Mahoney, Robin Marris, Perran Penrose, David Teece and Alain ,erbeke. Errors are mine. 1 Electronic copy available at: http://ssrn.com/abstract=1477885 I. INTRODUCTION 2009 marks the 50th anniversary of Edith Penrose’s The Theory of the Growth of the Firm (TGF thereafter). In a review of the book in the Economic Journal, Robin Marris (1961) predicted that TGF would prove one of the most influential of the decade. In his 1987 entry to the New Palgrave he added that “this proved an understatement” (p831). Marris’ statements were referring mainly to the economic theory of the firm, especially the literature on ‘managerial theories’, which were popular in the 1960s and in which he himself was a major contributor (Marris 1964). Neither Marris nor Penrose herself could foresee what appears to be the case 50 years on; this is a situation where the influence of TGF in mainstream economics has been rather limited (also Marris, 1987 and below). The managerial theories of the firm turned out to be no more than a footnote in the history of the neoclassical theory of firm, while Penrose receives no mention in leading neoclassical microeconomics, Industrial Organisation (IO) and economics of regulation textbooks (for example Kreps 1990; Tirole 1988, and Viscusi et al. 2001, respectively) and even in leading Economics, Organisation and Management textbooks, such as Milgrom and Roberts (1992). The book’s reception was anticipated by the reputable Oxford economist PWS Andrews. In his 1961 review of TGF Andrews noted that “A theory of the growth of firms surely should involve generalizations about their economic environment, or, in other words, just those questions about the (equilibrium) structures of industries which the author rules out of court at the start” (p.114). Andrews criticisms and predictions proved to in line with economists’ continued focus upon a market-based analysis of the equilibrium structure of industries. Early inroads from economics to management by Porter (1980, 1985), retained this focus. The TGF helped change this spectacularly, albeit so far mainly outside mainstream economics. Whether the apparent failure of the TGF to make significant inroads in neoclassical economics says something about the quality of the book, or instead the state of economics, however, only history will tell. This paper reveals, at least, where this author stands on this. 2 Electronic copy available at: http://ssrn.com/abstract=1477885 TGF’s influence outside mainstream economics, on the other hand, gradually exceeded by far Marris’ apparently optimistic assessment. Over the past 25 years or so, TGF has become a canonical reference to the currently dominant resource, knowledge, and (dynamic) capabilities – based approaches to business strategy, and to a lesser extent to the theory of the multinational enterprise (MNE) and International Business (IB) scholarship. TGF is also seen as seminal in (strategic) human resource management (SHRM). Of recent, the book has been used as the basis of integrating and extending the now flourishing literature on strategic entrepreneurship. TGF is also employed in order to explain the nature of the firm and its ability to create and capture value, which are at the heart of the theory of the firm, business strategy and organization scholarship. It is virtually impossible to predict where else and how far more the book’s ideas will branch out. Today TGF is one of the leading books on the Theory of the Firm with more than 7,800 citations in Google Scholar. This compares with, for example, around 1,600 for Chandler’s (1962) ‘Strategy and Structure’ and 7,500 for Cyert and March’s (1963) ‘A Behavioral Theory of the Firm’1. Although we will attempt some speculative predictions towards the end of this paper, its main focus will be to present TGF’s ideas and assess them critically. In so doing, we will aim to understand the book’s phenomenal success that motivated the present fourth edition on the occasion of its 50th anniversary, while celebrating the book’s and Penrose’s lasting influence. In particular, the aim of this paper is to: briefly discuss Penrose’s life and background to the writing of the book; the early contributions of the book to economics; subsequent ideas in economics which are related to, but do not appear to have drawn on the book; the book’s contribution to organizational economics, (international) business strategy, SHRM, strategic entrepreneurship, and recent debates on value creation and capture. We will also touch upon Penrose’s epistemology. 1 Chandler.s sum total for his three classic books, Strategy and Structure, The Visible Hand and Scale and Scope (Chandler, 1962, 1977, 1990 is around 9,500. Nelson and 0inter.s (1912) classic An Evolutionary Theory of Economic Change leads with around 12,000 citations2 a remarkable record partly attributable to the more general scope of the book, as an alternative to neoclassical economics, as a whole. 3 Following on from the above, we outline possible ways in which TGF can be generalized, critiqued and integrated with other theories, extant and emergent. Clearly the above is a rather tall order, both imperfect by its nature and reliant on earlier work by the present author, including joint work with colleagues. These are all recognized in the text. However, special mention is due here to Perran Penrose, Edith’s son, who has authored the life part, printed below with very little input from the present author: II. Edith Penrose’s Life2 Edith Elura Tilton was born on November 29, 1914 on Sunset Boulevard in Los Angeles. Her father, George Tilton, was a road engineer for the Department of Public Works, and was descended from early immigrants to the United States. Edith had two brothers, Harvey and Jack. It was a close and supportive family, living in a small town community. For much of the time, the family followed George as he surveyed the new Californian road network (he headed the party that surveyed Highway 1 along the Pacific coast). As a child Edith spent much of her time in road camps, packing along narrow trails, receiving a basic education in small shacks that served as classrooms. For a child the life was exciting and not without danger: she was about to engage in a close dialogue with a rattlesnake when her mother shot the snake through the head. The family settled eventually in San Luis Obispo, where she went to school. She went on to graduate at the top of her class in San Luis Obispo High, and entered the University of California at Berkeley. She gained a scholarship after her first semester, and more or less by accident decided to study economics. While still a student she met David Denhardt, who was slightly older than she was, and married him. She completed her studies in Berkeley in 1936 with a BA in economics, and the couple moved to Northern California where Edith took a job as a social worker with a depression relief agency. The first tragedy in a life that was to see more tragedy came when David, who 2 This section is a slightly edited version of a te3t written by Perran Penrose, see also Penrose and Pitelis (1999). 4 was a lawyer and an aspirant District Attorney, was killed in a hunting accident when Edith was four months’ pregnant. Circumstances surrounding the incident suggest the possibility that it might not have been an accident, but the mystery was never resolved. One of her teachers at Berkeley was the economist E F Penrose ('Pen'), who was born of Cornish parents in Plymouth, UK, in 1896. Like Edith, Pen came from a relatively humble background, had served in the trenches in the First World War, managed to finance himself through Cambridge after the war (assisted by his tutor W S Thatcher), and had come to Berkeley via Japan and the Stanford Food Research Institute. Edith acted as an assistant to Pen, who was 20 years her senior, and attended his summer extension classes in economics. In 1939 Pen moved to the International Labour Office (ILO) in Geneva at the suggestion of John Winant, who was at the ILO and who was later to become US Ambassador to Britain. Edith took a job as a researcher in the Economics and Statistics Section of the ILO, and travelled to Geneva. Life there was tense during this period, and Pen and Edith were involved in assisting Jews to escape from Germany through Switzerland amid real uncertainty whether Germany would invade Switzerland.3 The ILO then moved to Montreal, and Pen and Edith made the first part of the journey by bus across France in front of the German invasion. During this period she wrote Food Control in Great Britain, published in 1940, which analysed the problems of production, distribution and consumption of food in wartime Britain.4 When Winant was appointed to London, Pen went with him as Economic Adviser, and Edith served on his staff as a researcher.